One Way "Technology" Reduces Churn in the U.S. Mobile Business

One reason the U.S. mobile services market arguably is less competitive, or “more sticky” than some other markets has nothing to do with regulatory policy, bandwidth, financial assets, brand equity, differentiated services or even network coverage or other measures of “quality.”

For historical reasons, half the market has a legacy “GSM” air interface, while the other half has a legacy “CDMA” air interface for third generation platforms that remain significant, even for users of fourth generation Long Term Evolution services.

The reason is that voice and Internet access “fallback” are to the 3G networks. That has implications for customer retention and ability to switch carriers. Those same barriers provide the explanation for today’s carrier offers to subsidize switching costs (phone installment payments or service contract early terminations).

Verizon and Sprint, which use CDMA, represent 50 percent of the installed base. AT&T and T-Mobile US represent 49 percent of the installed base. What that means, in practice, is that every customer moving from a CDMA platform to a GSM platform, or a GSM platform to CDMA, necessarily must buy new devices.

With top of the line smartphones routinely costing $600 and up, that is a significant barrier to switching behavior. That, in turn, might explain why churn rates  in the U.S. mobile services business are relatively low, despite all the competitive offers.

Verizon and AT&T have churn rates that often are below one percent a month, a rate that is low for a consumer subscription service, historically.

T-Mobile US and Sprint have higher churn rates, but rates are dropping for those carriers as well. T-Mobile US has seen postpaid churn in the range of 1.5 percent recently. Sprint’s postpaid churn rates likewise now are in the 1.5 percent a month range.

To be sure, there are other forces at work. The large number of accounts connected on shared accounts is substantial. So the cost of changing a single account entails potential replacement of numerous devices.

AT&T, for example, has said that 70 percent of all its customers are on shared accounts.

Still, the fundamental divide--GSM versus CDMA--likely remains a barrier to full switching ability across the air interface barrier. And that is just one more reason why customer churn is relatively low in the U.S. mobile market.

source: Statista